It may come as a surprise to some, but high net worth (HNW) borrowers often have a more difficult time securing a mortgage than mass-market customers. These individuals can certainly afford to borrow – so what is the problem? And why aren’t lenders welcoming them with open arms?
Here, we identify the biggest challenges of high net worth borrowing, drawing on our years of experience in the industry, so you can navigate the market with ease.
- Regulatory changes
The basic principles behind 2014’s Mortgage Market Review (MMR) are very sound; any loan advanced should be affordable, and statements made by the applicant should be verified. It was, however, aimed at mainstream borrowers, and now the complex needs of HNW borrowers are not always met. Customers hoping to pop down to their bank with their passport and a payslip will find that lenders need to conduct in-depth checks to make sure you fit their criteria and, the less standard your income is, the higher the chance they’ll shy away from lending to you.
The MMR also introduced new regulation to streamline lending across the EU, requiring lenders offering foreign currency mortgages to offer a currency switch if two currencies fluctuate by more than a certain percentage. Although this saw some banks withdraw from the market, our access to lenders still offering foreign currency mortgages has not changed.
- Interest Only
In the aftermath of the financial crisis, interest only options all but disappeared as lenders withdrew their ‘riskier’ products from the market. In recent years, however, interest only mortgages have returned with a vengeance and are readily available from almost every lender.
Although this provides borrowers with the advantage of paying back less in the short-term, it can be a problem if you do not have a necessary repayment strategy in place. Interest only mortgages are generally a better choice for high net worth borrower’s compared to the mass-market, as they have significant or complex income, or high value assets (multiple properties, for example), to pay off the interest in lump sums or use assets as a repayment strategy.
Since the MMR, older borrowers – no matter what their financial situation – have often found themselves being turned away by banks. Many lenders imposed a maximum age of 70 to 75 at the end of the mortgage term, meaning that even middle-aged borrowers applying for a term running past retirement can now struggle. It seems obvious to us that lending to a HNW individual in their later years should not necessarily be viewed as riskier than lending to someone in their 30s; and it is unfair that age is sometimes the be-all and end-all for perfectly credible borrowers.
- Access & the high street
As we have said, mainstream lenders tend to favour borrowers who fulfil certain straightforward criteria: employed, repayment mortgage, 75% loan to value or less, mortgages at four times income. For those who don’t tick those boxes, the mortgage market is fragmented and confusing. Depending on how complex your circumstances are, there may only be one lender willing to consider your application. Having access to that particular lender is therefore crucial, but not necessarily easy. They may not be on Google, or on the high street, were there are around 10 lenders on average. The average broker will have access to 30-40 organisations. At Enness, we have worked with over 140 banks, including high street, private banks, international funds and boutique outlets, and have access to every type o lender on the market.
- Lack of broker experience
It is unusual for a broker to have in-depth knowledge or experience of high net worth borrowing. More commonly, their specialities will include first time buyers or prospective borrowers with adverse credit. The mortgage market is difficult enough to navigate, but for HNW borrowers it can be incredibly frustrating. If you fall into this bracket, it is especially important to engage the right sort of broker to guide you through the maze; a broker with a huge network of lenders and connections to turn to, whose speciality is the HNW space.
The problem with high net worth borrowing in the current market lies in underwriting procedures and the risk-averse approach of lenders towards mortgages. Tightening regulation means lenders are increasingly geared towards box-ticking, and anyone whose lifestyle or income doesn’t conform to their basic criteria is off the table. Simply put, HNW borrowers are often deemed too complicated a prospect and are beyond the competence of many high street lenders. That is why it is so important to engage a good independent mortgage broker to help you navigate the market.
We believe strongly in keeping our clients as informed as possible and we hope you have found this useful. If you have any questions about this article, or high net worth borrowing in general, please do hesitate to get in touch below.